A price just high enough to keep her in the market is what M21_OSUL5592_09_GE_C21.indd received.
The surpluses of the first two consumers--Juan and Tupak--are equal to the market consumer surplus.
The shaded areas are between the price line and the demand curve.
Con sumers gain at the expense of producers in the first two lawns.
The surpluses from the third and fourth lawns are eliminated by the maximum price.
The total surplus of the market is reduced by the maximum price.
The third consumer, Thurl, is willing to pay $16 to have his lawn cut, and the third producer, Cecil, is willing to cut a lawn for $6.
Thurl is willing to pay more than Cecil is willing to pay.
They would get a surplus of $5 if they split the difference and agreed on a price of $11.
Thurl and Cecil can't execute their transaction because of the maximum price.
The maximum price prevents Forest and Dee from executing a transaction that would generate a net benefit of $5, equal to Forest's willingness to pay, minus Dee's marginal cost.
When the price exceeds the equilibrium price, the total surplus of the market is maximized.
The minimum price for lawn cutting would be $19.
The minimum price is set by the government.
Only two people will have their lawns cut.
The consumer and producer surplus for the first two lawns is the same as the maximum price.
The total surplus that the consumer and producer could have gained is shown in Figure 21.3.
The first two consumers gain at the expense of the first two producers, whereas the first two producers gain at the expense of the first two con sumers.
The total surplus of the market is maximized by the market equilibrium.
There are no more transactions that would benefit a buyer and a seller once we reach the market equi librium.
The supply curve tells us that the potential seller of the sixth lawn cut has a marginal cost of $12, while the market demand curve tells us that the potential buyer of the sixth lawn cut is willing to pay $7.
The transaction doesn't happen because the potential buyer isn't willing to pay for the good.
A general lesson about mar kets can be learned from our example of the market for lawn cutting.
The typical market has thousands of buyers and thousands of sellers, each acting in their own self-interest.
The market reaches the quantity that maximizes the total surplus of the market.
We can rely on the actions of consumers and producers, each guided by self-interest, instead of using a bureaucrat to coordinate the actions of everyone in the market.
Adam Smith has an invisible hand.
Governments are active in most modern economies.
When one of the four efficiency conditions listed at the beginning of the chapter is not being met, government action can be justified on efficiency grounds.
For a market that meets the four efficiency conditions, the market equilibrium creates the largest possible total surplus, so government intervention can only decrease the surplus and cause inefficiency.
The invisible hand would guide consumers and producers to the market equilibrium if the government were solely motivated by efficiency.
Sometimes the government's goal is not to maximize the size of the pie but to slice it in favor of one group or another.
Domestic workers can lose their jobs if the government restricts shoe imports.
Consumers will pay higher prices if imports are limited.
When the government intervenes in an efficient way to slice the pie in favor of one group, the pie shrinks so there is a tradeoff between efficiency and distributional concerns.
We look at the inefficiencies of the government to see how much the pie shrinks.
The distributional consequences of intervention are briefly discussed.
The decision about whether intervention in an efficient market is worthwhile is made in the political sphere.
There are trade-offs associated with public policies.
Some groups of people who perform poorly in the market deserve special consideration.
If a society decides that workers who lose their jobs because of imports are deserving of special treatment, a more direct form of assistance is better than intervention by the government.
The government could provide money for workers to get training for new jobs.
When a single person renting a tiny apartment gets married, he or she is likely to move to a larger place.
A consumer in a rent-controled apartment may stay in a tiny apartment that is inexpensive.
In New York City, about 20 percent of rent-controlled apartments are not matching.
The most famous case of a bad tenant is the former Mayor of New York.
Under rent control, the government sets a maximum price for life in an apartment at a controlled rent that was roughly one housing, decreasing the quantity supplied and the total value third the market rent.
Exercise 2.7 is related to it.
Rent control and other high prices cause inefficiency.
The market effects of price controls are discussed.
The minimum price could be set by the government.
If the market meets the four efficiency conditions listed at the beginning of the chapter, government intervention reduces the total surplus of the market and causes inefficiency.
There are two different effects of a maximum price or price ceiling.
When the government sets a maximum price that is less than the equilibrium price, the result is permanent excess demand for the product.
Consumers want to buy more than producers want to sell.
Rent controls were instituted by the federal government during World War II.
Rent control spread to dozens of cities during the 1970s, despite only New York City continuing it after the war.
The maximum price on gasoline was set by the national government in response to sharp increases in the price of gasoline in the 1970s.
Price controls for prescription drugs are included in some proposals to control medical costs.
Excess demand and the total surplus of the market can be caused by a maximum price.
Rent control affects consumer and producer surplus.
The market equilibrium is $400 per apartment and 1,000 apartments.
The area between the demand curve and the supply curve is the total surplus.
The effect of a maximum price is shown in Panel B.
The total surplus of the market decreases when the number of apartments goes from 1,000 to 700.
Consumers pay $300 for the first 700 apartments instead of $400.
The surpluses associated with Apartments 701 through 1,000 are lost because they disappear from the market.
The market is inefficient because of the decrease in total surplus.
The decrease in the total surplus is not offset by a gain to anyone else.
The consumers and producers who are excluded from the market by rent control lose surpluses they could have received.
The principle of voluntary exchange can be used to see the inefficiency of rent control.
Both people are better off when there is a voluntary exchange.
300 excluded consumers are willing to pay more for an apartment than the suppliers require, but the transactions are illegal under rent control.
Rent control causes inefficiency because it outlaws transac tions that would make both parties better off.
The number of people seeking apartments exceeds the number of apartments available at the artificially low maximum price.
The opportunity cost of the extra time consumers spend searching for apartments is an additional cost of rent control.
Many people violate the spirit and letter of the law by cheating because rent control outlaws mutually beneficial transactions.
Consumers pay extra money to property owners in rent control cities.
These extra payments are often used to get the keys to an apartment.